Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

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PersianRugs
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Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by PersianRugs » Wed May 01, 2019 9:32 pm

I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Grt2bOutdoors » Wed May 01, 2019 9:37 pm

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my salary (depending if I early retire at around age 54 or retire at 59)

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
There is no right or wrong. It depends what your objective is here - maximum capital growth, reduction of risk or something in between?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by BradJ » Wed May 01, 2019 9:38 pm

I have a pension and I see that as my bond portfolio, so I think your reasoning is sound.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by RadAudit » Wed May 01, 2019 9:40 pm

IFF, you can stay the course through your 40's or whenever the stock market recovers from whatever dip happens in your late 30's / early 40's.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by PersianRugs » Wed May 01, 2019 9:42 pm

Grt2bOutdoors wrote:
Wed May 01, 2019 9:37 pm
There is no right or wrong. It depends what your objective is here - maximum capital growth, reduction of risk or something in between?
On a scale of 0-100, where 0 is reduction of risk and 100 is maximum growth, I am around a 70-75.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Ybsybs » Wed May 01, 2019 9:53 pm

Eh. Maybe.

I did the 100% stock thing for about a decade. It happened to work out well for me, but it was mere luck. My reason at the time was that I understood index funds and didn't understand bonds or bond funds.

You might consider adding a 10% bond or at least 5% bond position to make it possible for you to rebalance between stocks and bonds. There are times when bonds outperform stocks. A 90/10 portfolio could perform nearly as well as a 100/0 portfolio while having significantly lower risk.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Stinky » Wed May 01, 2019 10:07 pm

PersianRugs wrote:
Wed May 01, 2019 9:32 pm

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
This was also my situation. I stayed 100% stocks into my 50s.

Others might say that I was too aggressive, but it worked for me.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Watty » Wed May 01, 2019 10:09 pm

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
Is this correct reasoning, or am I extremely wrong?
That is a common mistake for two reasons;

1) Your pension is only currently worth what you would get if you quite working today and that likely is not a lot.

2) You may be saving less because you are expecting the pension. If you are saving to generate $1,000 a month in retirement since you have a pension you might need to save $100 a month while you are working(a made up number). Likewise if do not have a pension and will need to generate $5,000 a month when you retire you would need to save $500 a month (another made up number). The asset allocation you would need to use would be the same.

Once you are retired or near retirement the situation is a bit different since your risk profile would be different if you have a pension. For example if need $100,000 a year and you do not have a pension then if your portfolio tanked and was down 50% then you would have to live on $50,000 a year. If you had a $90K pension then you would need a much smaller portfolio to generate $10,000 a year. If that portfolio tanked and was do 50% then you would only need to live on $5,000 less.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by MotoTrojan » Wed May 01, 2019 10:13 pm

Whether you call it your emergency fund or what, having a "lot of cash" in a high-yield savings account doesn't jive with being aggressive, at-least in a relative sense. You should consider the cash part of your bonds and then decide if things are really aggressive.

If I have $1M in HYSA but my investment portfolio is $1000 of UPRO (3x leveraged S&P500, very risky/aggressive) my overall portfolio is the opposite of aggressive.

If your pension is low-risk/risk-free then I agree with your premise, that is a pretty fantastic pension. You could value it at something like 20x the annual pay-out; I could understand wanting to early retire but man would it be tempting to just live it up like crazy right now and ensure I can get into that 63-80% range.

Also FWIW I don't personally find this that aggressive. I expect to be taking more risk than 100% S&P500 past 33.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by cresive » Sat May 04, 2019 7:47 am

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
I think it all depends upon your tolerance for risk, tolerance for loss (loss-aversion) and what you want. From your post, it seems you have about 20-30 years before you will need any of this money. Therefore, you have a LOT of leeway as to how you invest. You also have the buffer of a nice pension, and I am assuming you are also eligible for social security benefits. Just guessing, but it sounds like you will have all of your necessities in retirement covered by guaranteed income. Thus, your housing (including taxes, utilities, etc. etc.), transportation, food and clothing can all be covered by stable income. This means all of your savings are gravy.

When I was your age, I didn't have such a luxury. However, not being of sound financial mind, I let my stock/bond ratio hover around 90%/10%. I made money hand over fist in the 90's. I lost my shirt in 2001. (note: I would have probably been better off, but I didn't know about rebalancing my asset allocation). I regained my balance in 2008, only to lose it again--here rebalancing wouldn't have helped, as both bonds and stocks tanked. However, I regained my previous balance around 2011/2012 and made a mint from the cheap equity shares I bought in 2009/2010 in 2013. Almost overnight I actually had a nice retirement nest-egg. I am now in my 50's and have reduced my equity exposure to 60/40. I have a slower, but less bumpy, climb. For my age, I want this because I don't' have the time to recover from a 2008 before I want to retire.

I offer my experience, as an example of what happens when you ride with a very high equity exposure. Since I didn't so anything dumb, like sell at the bottom of 2001 or 2008, I wasn't hurt by the major market corrections. Buy continuing to dollar average during the bottom of the market, I wound up making a lot of money when the markets recovered. If you can ride through the bad markets, your strategy should help you in the long run. Just don't panic and remember you have a nice cushion when you do retire.

Good luck,
Ben

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by dbr » Sat May 04, 2019 7:53 am

You would be better off thinking through the considerations of need, ability, and willingness to take risk. The answer might well come out at 100% stocks right now, but you would have a better idea why your judgement and preference for asset allocation has ended up there. So, do you need 100% stocks to meet your objectives? Can you financially manage the consequences of things going very badly in the stock market and not getting the results you expect? Can you psychologically stand watching a huge decline in your stock holding without giving up and selling out?

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by pondering » Sat May 04, 2019 7:54 am

You should model the pension as a financial asset. Doing so requires understanding the risks. Can you be more detailed about your pension? Will you require life insurance to reduce your risk of dying early? Will that be affordable?
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by David Jay » Sat May 04, 2019 8:19 am

Can you force your intellect (perhaps with the help of an “investment policy statement”) to control your emotions when the “big one” hits? If you can, then 100% Stocks is an acceptable position.

If you can’t, then author Bill Bernstein has this warning for you (from “Deep Risk”): “...mistiming the market is probably the most frequent and severe form of permanent capital loss”.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by MNGopher » Sat May 04, 2019 8:35 am

It's hard to know how aggressive you really are without knowing what "a lot of cash" is. Is this just the standard 3-6 month emergency fund or does it greatly exceed that? What is your ratio of stock funds to cash?

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by smectym » Sat May 04, 2019 8:43 am

I guess if one has “a lot of cash in a HYSA” then one isn’t 100% in stocks. So not sure what the question is unless OP is asking whether OP should drain the cash account to put it in stocks.

There are quite a few “”I’m 100% stocks, convince me I’m wrong” and “Am I crazy to be 100% stocks?” posts lately. But few defiantly brag they are “100% bonds” or “100% cash.” Why not, are those last two “extreme” allocations so much more obviously absurd than 100% stocks?

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by SGM » Sat May 04, 2019 8:58 am

I was 100% stock while in the accumulation mode. The key is to keep investing if the market crashes and to not panic sell. Any money you need in the shorter term is better invested in bonds, but I never felt the need for it until close to retirement. A few years prior to retirement I scaled back on the stock allocation. I had excellent job security, and disability insurance early. A few times I sold when my investments were doing well to buy real estate or a new vehicle. Or my investments were doing well relative to real estate prices. I guess I was lucky for 30+ years. :D

I do have friends who had excellent future pensions and job security, who felt it made them take risks with their retirement money by being heavily in stocks. In 2008 they were very disturbed by their losses.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by dbr » Sat May 04, 2019 9:01 am

smectym wrote:
Sat May 04, 2019 8:43 am
I guess if one has “a lot of cash in a HYSA” then one isn’t 100% in stocks. So not sure what the question is unless OP is asking whether OP should drain the cash account to put it in stocks.
Exactly. This investor is apparently not 100% stocks because he also has a lot of cash. Also there might be confusion that for stock/bond asset allocation cash is a "bond."

The possible pension is a different issue because, as pointed out, the pension is at risk until it is actually granted, and even then could be at some risk. Counting on pensions at a young age is a dangerous game.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Slapshot » Sat May 04, 2019 9:24 am

FWIW: I'm retired with a decent pension that pays all my living costs with some left over every month. When faced with your decision, I opted for safety. So I currently have around 25-30% in stocks and the rest in bonds and cash. Over the past 10 years or so I've averaged around 7%. That's fine with me. I sleep well at night. But then, I'm not a youngster like you.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by JoMoney » Sat May 04, 2019 9:28 am

I'm of the opinion that you can calculate a pension, social security, SPIAs and other insurance payouts, and maybe other low-risk promises to pay a fixed amount as a form of fixed-income bond and adjust your portfolio with that in mind.
But different people have different risk preferences. Some people just can't bare to see the ups and downs of individual components.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by JTColton » Sat May 04, 2019 9:49 am

It makes sense for me, but I get my pension at 38 and it will cover minimum expenses.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Nutmeg » Sat May 04, 2019 10:00 am

Technically, you do not yet “have a pension” because you are not yet receiving it. It appears that have the possibility of a pension in the future.

Questions to ask yourself include:
If you retired today, would you receive a pension, and if so, at what percentage of your salary?
Do you have job protection, such as that of a tenured teacher?
Do you have adequate disability insurance in case you become disabled before you retire?
Do you have adequate rental/homeowners, auto, and umbrella insurance so that your stash of cash is not at risk?
Is your employer a public entity? If it is a private entity, has it adequately funded its pension liabilities, and what assurance do you have that it will do so in the future?

Note also that the Pension Benefit Guaranty Corporation does not guarantee all benefits of the funds it covers. The Annual Funding Notice I just received says in part that:

The PBGC does not guarantee benefits for which you have not met all age, service, or other requirements.

Benefit increases and new benefits that have been in place for less than one year are not guaranteed. Those that have been in place for less than five years are only partly guaranteed.
Last edited by Nutmeg on Sat May 04, 2019 10:04 am, edited 1 time in total.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by tadamsmar » Sat May 04, 2019 10:01 am

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
Your asset allocation appears to be X% stock/Y% cash. Your 401K & Roth are not your asset allocation. Your asset allocation includes your HYSA.

It is impossible to tell how aggressive you are without knowing your actual asset allocation.

This one of the reason why your reasoning is not correct.

But, perhaps "a lot of cash" (whatever that means) is still a small percentage of your asset allocation.

Also, if you have more than $250,000 in cash in one HYSA, then the excess is not covered by FDIC insurance.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by MnD » Sat May 04, 2019 10:48 am

It's fine.
If you were in an appropriate target date fund for age 33 you would be 90-99% equity - pension or no pension.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by ruralavalon » Sat May 04, 2019 11:46 am

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
In my opinion that is not correct reasoning, you are far wrong.

How certain are you that you will work there another 20-30 years? Don't just assume that you will, on average employees switch employers about every 5 years.

How certain are you that the employer will still exist, and that the pension plan will not be dropped or modified, during the next 20-30 years?

I would not really start counting on the pension income until retired or nearly retired.

I do think it's reasonable to count the current cash out value (i.e. the amount of cash you could get today if you left the employer today) as a part of the fixed income allocation.
Last edited by ruralavalon on Sat May 04, 2019 11:50 am, edited 1 time in total.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by KyleAAA » Sat May 04, 2019 11:49 am

If you have a lot in cash, you are not 100% stock. If you want to bucket your portfolio as a behavioral aid, then sure.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Dandy » Sat May 04, 2019 11:57 am

At 33 you really don't know if you will get your pension. Even many state government pensions are underfunded -- by a lot. No sense that the will power to take corrective action is on the horizon either. Company pension plans are also somewhat iffy in many cases. Many companies are trimming their pension benefits -- say by limiting themselves to a stated contribution vs a stated benefit. They also tend to downsize staff before the staff's desired retirement date. (Happened to me 2X).

The congress is also having trouble in "fixing" Social Security. Rather than raise taxes they seem to lean toward reducing benefits, especially on those who are not in or close to retirement.

So, I would tend to ignore pension and Social Security too for the purpose of deciding on your allocation. You say you have lots of cash. That is part of your allocation. Determine the risk you are willing to take and invest accordingly. Try to keep in mind the dollars at risk vs just the percentages. As your portfolio grows the percentages can be misleading to some extent. Assume a 50% loss in dollars and how long it would take to make up that "loss" in contributions and/or modest recovery. As you age that also makes a difference.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by midareff » Sat May 04, 2019 12:23 pm

As others have said there is not right or wrong answer. I would ask you however, with a pension between 21 and 26 years away why do you think you can count on it in the form you presently know it? or SS at the end of that period for that matter as well.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by infotrader » Sun May 05, 2019 9:45 am

I am 59. Between my wife and myself, we will have 3 pensions plus ss.
We always have 100% in equities. In 2009, there was a 50% loss but I did not sell, but instead invested whatever I could the same way.
I am only interested in accummlation and try to build a permanent portfolio. I don't have an emergency fund, but I can always find stuff to sell when I need money. I never had money set aside for college, etc.
For me, common wisdom is for others, since my goal and situation are not common.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Dottie57 » Sun May 05, 2019 9:54 am

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
The only concern s you might not have the pension job until retirement. In other words don’t count your chickens until.......
I am middle of the road, all my life, in most things because I don’t know the future.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by calmaniac » Sun May 05, 2019 10:04 am

+1 on what Nutmeg said

Don't count your pension chicks until they've hatched, particularly if the pension source is not well funded (local gov't, company).

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by infotrader » Sun May 05, 2019 10:55 am

calmaniac wrote:
Sun May 05, 2019 10:04 am
+1 on what Nutmeg said

Don't count your pension chicks until they've hatched, particularly if the pension source is not well funded (local gov't, company).
Agree, especially the ones in Illinois.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by CurlyDave » Sun May 05, 2019 11:28 am

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
...Is this correct reasoning, or am I extremely wrong?
I am firmly in the camp of treating a pension as "phantom bonds" for asset allocation purposes. And, I put my money where my mouth is -- born in 1945 and 95% stocks because DW and I both have pensions and SS. Jack Bogle himself recommended considering pensions and SS as bond-like investments.

I use ETFs instead of mutual funds, and what I have started to do is put trailing stops on my ETFs. I have about one year worth of expenses with a stop 5% below the max price the ETF reaches. I will probably increase this to 2 or even 3 years in the next month.

I am also diversified into brick and mortar income properties, another controversial topic here, but when i look at Stocks/Phantom Bonds/Real Estate my AA is 33/33/33.

As far as the objections to pensions not being "guaranteed", I see nothing wrong with changing one's AA the very second there is any real chance of a pension nothing honored. An AA is not a set it and forget it thing. It must be reviewed periodically and especially after a major change in the outlook for any substantial portion of it. But, until then, treat it like a financial asset.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Green Street » Sun May 05, 2019 11:32 am

Operate as if you’re not getting a pension.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by ruralavalon » Sun May 05, 2019 12:11 pm

CurlyDave wrote:
Sun May 05, 2019 11:28 am
PersianRugs wrote:
Wed May 01, 2019 9:32 pm
...Is this correct reasoning, or am I extremely wrong?
I am firmly in the camp of treating a pension as "phantom bonds" for asset allocation purposes. And, I put my money where my mouth is -- born in 1945 and 95% stocks because DW and I both have pensions and SS [emphasis added]. Jack Bogle himself recommended considering pensions and SS as bond-like investments.

I use ETFs instead of mutual funds, and what I have started to do is put trailing stops on my ETFs. I have about one year worth of expenses with a stop 5% below the max price the ETF reaches. I will probably increase this to 2 or even 3 years in the next month.

I am also diversified into brick and mortar income properties, another controversial topic here, but when i look at Stocks/Phantom Bonds/Real Estate my AA is 33/33/33.
So you are about 74 years old, retired and currently receiving your pension income. You stayed healthy and uninjured, worked for your employer long enough to qualify, and the pension fund still exists and pays benefits.

That is a far different situation than the OP, who is age 33 and thinking of retiring around ages 54-62 (about 20-30 years from now). In another post (link) OP just started this job 7 months ago, and OP's age is stated as 23 so retirement would be 30-40 years away.

CurlyDave wrote:
Sun May 05, 2019 11:28 am
As far as the objections to pensions not being "guaranteed", I see nothing wrong with changing one's AA the very second there is any real chance of a pension nothing honored. An AA is not a set it and forget it thing. It must be reviewed periodically and especially after a major change in the outlook for any substantial portion of it. But, until then, treat it like a financial asset.
So if the pension becomes shaky because the stock market has crashed, OP can move fast enough to stop the portfolio loss?

Pensions often become shaky (e.g..because of unrealistic projections of high returns, risky investments that flop) before that is readily apparent to the general public, so switching "the very second" may not be truly practical.

And if OP loses his/her job because of a layoff, injury or illness OP will then switch the asset allocation? About 43% of employees retire earlier than planned, about half due to health or injury, about half due to changes in the workplace. EBRI, "2019 RCS Fact Sheet # 2". I don't believe it's wise to wait for a crisis to happen to consider its effect.

Most people do not work for a single employer long enough to qualify for the full pension benefit. Median job tenure is approximately 5 years. EBRI, "Trends in Employee Tenure, 1983–2018". The most likely outcome is no pension benefit, or a reduced benefit, even if the employer offers a well funded pension plan.

I do think it's reasonable to count the current cash out value (i.e. the amount of cash OP could receive today if he/she left the employer today) as a part of the fixed income allocation. At 7 months on the job for OP, the current cash out value is probably zero.
Last edited by ruralavalon on Sun May 05, 2019 1:34 pm, edited 5 times in total.
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ChrisC
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by ChrisC » Sun May 05, 2019 1:23 pm

Depends on the pension and other family needs, which could include a spouse and children or other familial obligations. I was 27 at the start of my Federal career, with the idea that my wife and I would start of family of 3-4 children and my wife would likely interrupt her career and carry the lion's share of the weight in raising our children. I really never considered the prospect of a Federal pension because jobs and positions change quite rapidly and I could always wind up back in the private sector -- and, in fact, on a number of occasions I actively sought employment outside of the Government, and dwelled on one offer I received a very long time. In retrospect, I was fortunate that none of these opportunities in the private sector materialized.

My investment approach for at least the first 20 years of my career was to ignore the prospect of the pension, but we were very aggressive in our allocations (100 percent equities) for our retirement plans (my TSP, my agency 401K, my IRA, her 401K, her 401a, her 457b, her IRA) and very conservative when it came to funding children and family needs (US Bonds and conservative 529 plans for the kids' postsecondary educations), but with little cash reserves. As we advanced in age, and as our children left our nest and went off to college (with two of them grabbing free tuition at public colleges), the pension took on greater significance to us, as we compared our lot to friends who were in the private sector; nonetheless, we maintained a strong allocation in equities. In retirement, we have slightly adjusted our allocations to a 85/15 equity tilt but we also have a stupid amount of cash from real estate sales from homes we previously owned.

Going forward, we will likely adjust our allocation further, perhaps to a 75/25 equity tilt for our investments and probably still have a stupid amount of cash. My pension alone takes care of all our needs, including mortgage and tax payments, among other living expenses. We travel a lot, annually fund $5K to grandchildren 529 plans. We have more than enough to take good care of us. We're essentially managing our retirement plans to backstop other family members who might be in need of help and to provide a sound legacy to our children (who will likely earn more income than we ever earned in our lifetimes). At some point, we will become more generous in charitable and educational donations.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Thesaints » Sun May 05, 2019 1:37 pm

smectym wrote:
Sat May 04, 2019 8:43 am
I guess if one has “a lot of cash in a HYSA” then one isn’t 100% in stocks. So not sure what the question is unless OP is asking whether OP should drain the cash account to put it in stocks.

There are quite a few “”I’m 100% stocks, convince me I’m wrong” and “Am I crazy to be 100% stocks?” posts lately. But few defiantly brag they are “100% bonds” or “100% cash.” Why not, are those last two “extreme” allocations so much more obviously absurd than 100% stocks?
Those are the kind of posts to be expected on the tail of a 10+ year exceptional bull market.

The greatest risk the OP would be incurring is not so much in his AA, but in the confidence of projecting job, salary and pension 20+ years in the future.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by WS1 » Sun May 05, 2019 4:39 pm

Green Street wrote:
Sun May 05, 2019 11:32 am
Operate as if you’re not getting a pension.
Until how far out from retirement date?

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arcticpineapplecorp.
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by arcticpineapplecorp. » Sun May 05, 2019 5:12 pm

Ybsybs wrote:
Wed May 01, 2019 9:53 pm
You might consider adding a 10% bond or at least 5% bond position to make it possible for you to rebalance between stocks and bonds. There are times when bonds outperform stocks. A 90/10 portfolio could perform nearly as well as a 100/0 portfolio while having significantly lower risk.
not true. look here:
https://personal.vanguard.com/us/insigh ... llocations

while vanguard shows the difference in portfolio allocations in the past in 10% increments (80/20, 70/30, 60/40, etc) for some unknown reason they don't show 90/10 or 10/90. Instead they go from 100/0 to 80/20 and from 20/80 to 0/100. I'm sure you can use portfolio visualizer to get the numbers but I think it's easy enough to "split the baby" of losses between 100/0 and 80/20 to see what a 90/10 would have been.

The link above says the one year worst loss for 100/0 was -43.1% whereas the one year worst loss for 80/20 was -34.9%.

Therefore, it's kinda likely that the worst one year loss that Vanguard is leaving out for a 90/10 portfolio would have been somehwhere in between the two numbers above (between 35% loss and 43% loss). So we can say, likely a -39% loss for a 90/10 portfolio.

Is a 39% loss for one year really "significantly lower risk" than a 43% loss?

I don't think so. I really don't think you'd be saying, "Whoopee! I only lost 39% instead of 43%!! Boy am I glad!"

Rule of thumb is for every 10% in bonds you add to your portfolio, you reduce returns by about 0.5%. So you might consider that worth it to reduce your worst one year loss by 4%. I wouldn't call that "significant" however.

I think we should be careful about our word choice. It's also possible for a bond portfolio to outperform stocks. There are only a couple times this can happen however.

One is if you're choosing to measure a period in which stocks are down. Then of course, bonds would look great in comparison.

The other is like 1980-2009 the bond bull market when bonds performed similarly to stocks with significantly less risk. Why was that? Interest rates in the 80s were double digits and not only came down over the next 30 years...but came down to levels never expected, like 0% (or close). Considering we're not in that scenario now, I'd say that's pretty unlikely to recur.

So we're left with knowing your bonds are likely to outperform when stocks go down (like recession, bear market),etc. If you want to hold them for that reason, fine. But bonds are paying 2.5% for an intermediate high quality bond. You know what you're going to get when you buy bonds. You don't know exactly (but the Gordon equation can help get close) with stocks which is why they should pay a higher premium over the long term...because there's uncertainty and risk and investors are rewarded for taking risk. You are not rewarded for certainty. Show me otherwise.

I'm not saying bonds don't have a role in a portfolio. They do. And their presence can allow you to rebalance (though you can also just as easily add new money to the asset class that went down). But rebalancing isn't for improving returns. It's for maintaining one's risk profile.

Research has shown (even Jack Bogle showed us) that while rebalancing is important to maintain a consistent asset allocation, the unbalanced portfolio actually performed better (but carried greater risk of course).

One final thought for the OP, you can be as aggressive as you want to be, provided you're aware of the risk you're taking. So look at the vanguard portfolio models and determine if you can handle the risk of really bad worst one year losses (and so on). It could just as easily be argued that you may be taking risk you don't need to, in which case why are you? Swedroe says only take the amount of risk you have the need, ability and willingness to take, but no more.
Last edited by arcticpineapplecorp. on Sun May 05, 2019 8:33 pm, edited 1 time in total.
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TheDDC
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by TheDDC » Sun May 05, 2019 5:34 pm

PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
I concur with your assessment. I'm 36, state pension, and 100/0. My AA will most likely stay the same until I'm 80 or something and might possibly need to preserve a chunk without fluctuations due to some sort of catastrophe toward the end of my life. For the time being I treat the pension as my fixed allocation.

-TheDDC

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by WS1 » Sun May 05, 2019 5:56 pm

TheDDC wrote:
Sun May 05, 2019 5:34 pm
PersianRugs wrote:
Wed May 01, 2019 9:32 pm
I am 33, and 100% in stocks for both my 401k & Roth IRA.

I realize this is pretty aggressive, but my reasoning is that I have a lot of cash in a HYSA, and once I retire I'll be getting a pension somewhere between 36%-63% of my final salary (depending if I early retire at around age 54 or retire at 59). [Though, if I retire at 62, I'll get 80% of my salary]

My reasoning is because of those two factors, I don't need any bonds until way into my mid-late 40's.

Is this correct reasoning, or am I extremely wrong?
I concur with your assessment. I'm 36, state pension, and 100/0. My AA will most likely stay the same until I'm 80 or something and might possibly need to preserve a chunk without fluctuations due to some sort of catastrophe toward the end of my life. For the time being I treat the pension as my fixed allocation.

-TheDDC
How did you decide how much to save for retirement? I’m the same age, in a state plan that doesn’t lock me in to my specific employer, and am not actively seeking(though sometimes dreaming) employment outside the gov.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Thesaints » Sun May 05, 2019 5:58 pm

WS1 wrote:
Sun May 05, 2019 4:39 pm
Green Street wrote:
Sun May 05, 2019 11:32 am
Operate as if you’re not getting a pension.
Until how far out from retirement date?
Whatever is vested you should count. It gets a little tricker which discount rate to use to calculate present value...

3504PIR
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by 3504PIR » Sun May 05, 2019 6:07 pm

I think it comes down to the individual perspective and risk profile and not the pension, although a pension will alter some people’s risk profile (mentally). We have 3 pensions and at some point SS will kick in. My portfolio will largely pass on to my daughter and I could invest it based on her age, etc but I keep it at my own AA because it is currently our money and not hers. There are many ways to approach all of this, but in the end it felt right to us to do what we’re doing.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by WS1 » Sun May 05, 2019 6:25 pm

Thesaints wrote:
Sun May 05, 2019 5:58 pm
WS1 wrote:
Sun May 05, 2019 4:39 pm
Green Street wrote:
Sun May 05, 2019 11:32 am
Operate as if you’re not getting a pension.
Until how far out from retirement date?
Whatever is vested you should count. It gets a little tricker which discount rate to use to calculate present value...
So don’t assume I’ll continue to work for a participating employer for the next 25 years and walk away with 70% of my final salary.

Thesaints
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Thesaints » Sun May 05, 2019 6:27 pm

WS1 wrote:
Sun May 05, 2019 6:25 pm
Thesaints wrote:
Sun May 05, 2019 5:58 pm
WS1 wrote:
Sun May 05, 2019 4:39 pm
Green Street wrote:
Sun May 05, 2019 11:32 am
Operate as if you’re not getting a pension.
Until how far out from retirement date?
Whatever is vested you should count. It gets a little tricker which discount rate to use to calculate present value...
So don’t assume I’ll continue to work for a participating employer for the next 25 years and walk away with 70% of my final salary.
You can assume, but that doesn't make it true unless your employer also agrees. Not to mention disability and other disagreeable surprises.

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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Green Street » Sun May 05, 2019 6:40 pm

Thesaints wrote:
Sun May 05, 2019 6:27 pm
WS1 wrote:
Sun May 05, 2019 6:25 pm
Thesaints wrote:
Sun May 05, 2019 5:58 pm
WS1 wrote:
Sun May 05, 2019 4:39 pm
Green Street wrote:
Sun May 05, 2019 11:32 am
Operate as if you’re not getting a pension.
Until how far out from retirement date?
Whatever is vested you should count. It gets a little tricker which discount rate to use to calculate present value...
So don’t assume I’ll continue to work for a participating employer for the next 25 years and walk away with 70% of my final salary.
You can assume, but that doesn't make it true unless your employer also agrees. Not to mention disability and other disagreeable surprises.
Exactly, nothing is official until you’re at that point of receiving said pension. A lot of things can happen in between, and I’ve seen many people get screwed out of their pension. Follow a proper AA as if you’re not receiving a pension and maintain a great savings rate, the pension will be icing on the cake.
Searching Through The FiRE

Thesaints
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Thesaints » Sun May 05, 2019 6:43 pm

Yeah. Bonds can default too and stocks become worthless. We still count their present value, don't we ? Yet, somehow, a vested pension is supposed to be many time riskier than a junk-rated bond...

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ruralavalon
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by ruralavalon » Sun May 05, 2019 6:47 pm

Thesaints wrote:
Sun May 05, 2019 6:43 pm
Yeah. Bonds can default too and stocks become worthless. We still count their present value, don't we ? Yet, somehow, a vested pension is supposed to be many time riskier than a junk-rated bond...
Just count it at its current cash out value, what lump sum you would get if you left the employer today.
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Thesaints
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Thesaints » Sun May 05, 2019 6:50 pm

ruralavalon wrote:
Sun May 05, 2019 6:47 pm
Thesaints wrote:
Sun May 05, 2019 6:43 pm
Yeah. Bonds can default too and stocks become worthless. We still count their present value, don't we ? Yet, somehow, a vested pension is supposed to be many time riskier than a junk-rated bond...
Just count it at its current cash out value, what lump sum you would get if you left the employer today.
It seems to me a far larger error not to count a vested pension than to count it without reducing its value for the probability it won't be paid.

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ruralavalon
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by ruralavalon » Sun May 05, 2019 6:52 pm

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Thesaints
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Re: Say you have a pension & lot of cash. With those in mind, does it make sense to have a more aggressive allocation?

Post by Thesaints » Sun May 05, 2019 6:53 pm

ruralavalon wrote:
Sun May 05, 2019 6:52 pm
Thesaints wrote:
Sun May 05, 2019 6:43 pm
Yeah. Bonds can default too and stocks become worthless. We still count their present value, don't we ? Yet, somehow, a vested pension is supposed to be many time riskier than a junk-rated bond...
Just count it at its current cash out value, what lump sum you would get if you left the employer today.
What if present cash out is zero, but if I leave my job and wait 2 years they pay me $1,000/month ?

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